Titch: Patent reform getting long-overdue attention

Federal agencies and Congress are seeking ways to rein in 'trolls'

By Steven Titch

Updated 7:17 pm, Tuesday, November 19, 2013

Patent reform is gaining traction on Capitol Hill, and with good reason. Patent "trolls" - shell companies that profit or attempt to profit from patents they had no hand in creating - are harming tech and other innovative industries in the United States. This sector helped add 10,000 jobs to our Texas economy in 2012.

Currently, there are seven separate proposed laws aimed at addressing the issue of patent trolls, or, in legislative parlance, patent assertion entities. These include the Innovation Act sponsored by Republican Reps. Lamar Smith, of San Antonio, and Blake Farenthold, of -Corpus Christi, and due for markup this week, as well as the Senate version introduced Tuesday (the Patent Transparency and Improvements Act of 2013). The bills aim to protect innovators from frivolous litigation brought by these so-called "trolls." U.S. Sen. John Cornyn, R-Texas, also has sponsored a legislative solution known as the Patent Abuse Reduction Act. Though it's unclear which legislative course will be selected, it is clear that lawmakers are focused on this issue and action will be taken.

But government may not need to get involved, which should be the preferred route of any business. Within the realm of intellectual property, there is a possible solution that also is a source of intense debate: the sometimes questionable undertakings of patent pools - for-profit companies that exclusively cross-license a particular technology standard like Blu-Ray or MP3. When properly administered, patent pooling reduces product design and manufacturing costs: An innovator or manufacturer pays the pool for a single license covering all patents associated with the technology standard. This is extremely beneficial in today's high-tech environment, when a particular product utilizes hundreds if not thousands of individual patents.

Theoretically, patent pools should only license essential and complementary patents related to a particular technology. For example, in a wireless technology patent pool, one patent may cover the way voice is encoded into data. A complementary patent would cover how that data is converted into a radio signal. They become legally questionable and anti-competitive, however, when they begin to incorporate "substitute" and "nonessential" patents.

The perfect case study for such a scenario is the MPEG LA patent pooling firm - a private company formed in 1997 to administer patents related to a video compression standard called MPEG-2. This standard can be found on common consumer technologies like personal computers, televisions and gaming consoles. Today, MPEG LA has exploded to manage some 17,000 patents, many of which, critics say, are substitute and nonessential.

Even ardent defenders of intellectual property rights should question whether it's appropriate for one patent pool to control rights to a number of competing technologies. The patent providers within a given pool have a vested interest in promoting only one, and entities like MPEG LA lack arms-length management and administration that would serve as a check on such favoritism. These tactics harm consumers by reducing incentives for innovation and keeping prices high - the antithesis of what has made Texas the second-highest provider of technology jobs in the U.S. Entities like MPEG LA do not have consumers or even individual companies in mind - their only goal is to maximize profit through their control of licensing fees.

As with Congress, government agencies are taking a closer look at patent issues. The Obama administration, in calling for patent reform, cited research that found "patent assertion entities" filed nearly 60 percent of the patent lawsuits in the U.S. in 2012, up from 25 percent in 2007. And the Federal Trade Commission wants to conduct a broad study of patent trolling to coincide with the legislative initiative now in play.

Patent pools like MPEG LA could be part of the patent reform solution and keep big government at bay. They could reduce their anti-competitive grasp to only essential and complementary patents, choose independent administration and adopt licensing practices that align their fees with patent value that accounts for expired patents.

"Authors and inventors" would remain protected, yet an innovative and dynamic marketplace can flourish. Or the pools can continue their anti-competitive practices at the expense of consumers and technological innovation more broadly.

The choice is theirs. Which will they choose?

Titch is a telecom and technology policy analyst whose work had been published by the Reason Foundation and the Heartland Institute. He is based in Sugar Land.